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Abstract

The motivation for this theoretical paper is to “shed further light” on electricity market liberalisation. The major influences on electricity prices in each country are local supply and demand conditions, which include costs of renewables and/or regulatory effects on pricing. This also includes effects of public or private monopoly pricing. However, many countries from a representative sample of groups of economies, show long-term equilibrium relationships in their electricity and energy stock market sectors. In these countries in the short-term, exogeneity lies with the energy sectors in the EMU, the UK, New Zealand, the Philippines, Hong Kong and Thailand. In the cases of the US and India the electricity markets are exogenous, which is probably due to the sheer size of those markets. Where there is evidence of cointegration the nexus between electricity and energy sectors remains and the strength of this relationship is indicative of greater progress in electricity market liberalisation. This is because their electricity prices are influenced to a significant degree by global fossil fuel supply costs. In those cases domestic factors such as cost of regulatory environments are less important.

This paper describes a new formulation of the partial adjustment model (PAM) and its speed of adjustment coefficient. Speed of adjustment coefficients have been used to measure the efficiency or inefficiency in financial markets. Using the model by Amihud and Mendelson (1987), Damodaran (1993) and Brisely and Theobald (1996) and Theobald and Yallop (2004) have developed speed of adjustment coefficients for this purpose. Whilst their formulation suffers from non-synchronous problems, the formulation of the new PAM in this paper avoids such problems. The new PAM is used to measure the efficiency of CSC constituent stocks and Australian resource stocks. In both categories, some stocks overreact , some under-react and some fully adjust to new economic information and are efficient.